This is the final article in our series helping business drivers and SME fleets choose electric, with support from our partner LeasePlan.
You can read the first article here: Time For A Vehicle Detox – Five Steps To Going Electric For SMEs.
And the third here: SME Fleets Need Help On The Road To Electrification.
THERE are three choices available to SME fleets when it comes to funding a vehicle; first, you can buy the car or van; second you can ‘borrow’ the money to buy the vehicle; or finally you can ‘borrow’ the car or van (pay for use).
These basic concepts cover a wealth of product choices and brand names in a market worth billions of pounds a year.
So, how do you choose? What’s right?
For many small businesses, it is a case of ‘doing what we have always done’, especially when businesses are used to purchasing vehicles with company cash.
But a review may be long overdue and it could benefit your bottom line.
The starting point is often a total cost of ownership calculation, which tends to show why outright purchase is rarely the best option.
That’s not to say outright purchase doesn’t have its advantages. It is the most flexible and allows SMEs to be the master of their destiny when it comes to decisions about vehicles. But it remains a costly convenience.
The reason is clear the second you drive off the forecourt. If you buy a lovely new car for £30,000, it is likely to depreciate by £5,000 or more within yards as it becomes a second-hand car.
Furthermore, your money is then tied up in a depreciating asset for as long as you own it, when it could be doing something more useful.
Someone also needs to manage the car or van through its life, get it serviced, repaired, given an MOT and then try to get a good price when it needs to be replaced.
This explains why leasing is so popular.
A specialist supplier handles the cost of acquiring, running and selling the car, while you focus on running your business.
Furthermore, all the costs are spread over the life of the lease. This cost is divided equally by the number of months the vehicle is leased for, so instead of parting with £30,000 up front, your business needs to find around £300 a month, plus an initial rental usually equivalent to three or six months’ rentals, depending on the deal.
After that, everything is taken care of by the leasing company, including servicing if you pay for the additional peace of mind of inclusive maintenance. All you have to do is look after your vehicle during the lease, then hand it back. Simple.
What about electric vehicles?
There is very good reason to lease an electric vehicle: the pace of technology is increasing so quickly, it’s easy to be left with out of date vehicles if you buy.
Here’s an example: the current BMW X5 xDrive45e – a plug-in electric hybrid SUV – has a zero emission range of 54 miles thanks to a 24kWh battery – exactly the same size as the original all-electric Nissan Leaf.
So with the many benefits of an SME fleet running an electric car – the lower operating cost, the extremely low benefit in kind tax, and the environmental benefits of zero emission – it makes more sense to lease an EV over your selected rental period and then step into a brand new EV, featuring all the latest in EV advancements – at your next lease renewal.
Take Control of Your Fleet Costs
Leasing provides the tools for growing businesses to electrify their fleets, explains LeasePlan. Here’s why:
The latest vehicles: A choice of desirable new cars and vans, supporting your sustainability goals and keeping employees safe.
Predictable costs: Set monthly payments including maintenance to suit your usage, removing the worry of unexpected bills
Manageable mobility: Leasing frees up cash to invest in the business, and lets you focus on helping it to grow.
LeasePlan has over 50 years’ experience tailoring leasing solutions to businesses, and we’re here to help with your electrification plans.
But…there is a but.
If your business can’t control your drivers, then beware. Leasing companies are not charities, so they will issue an additional charge if the vehicle is returned in poor condition.
Leasing companies typically use an industry rulebook for identifying damage that will incur a charge; it is called the Fair Wear and Tear Guide and it is an agreed national standard set down by the British Vehicle Rental and Leasing Association.
The rules are simple.
If your drivers cause enough damage to reduce a vehicle’s expected value, then you will be charged for the difference.
This concept is fundamental to how leasing works, as your monthly payments are calculated on the difference between the car’s acquisition cost and its predicted resale value.
If your drivers cause damage that reduces a vehicle’s value on the used car market, then you must pay for the lost value or repairs. Otherwise the leasing company loses money on the whole deal. These are called end of lease charges.
It is a fundamentally fair system, but it can be a shock if you haven’t conducted regular vehicle checks, because the result of three or four years of vehicle abuse by a driver is only revealed when the car is returned.
As leasing companies still own the vehicle, they also receive correspondence about fines and penalties, so they often charge a fee to process them. If you receive lots of fines and penalties, then these administration fees can really add up.
In summary, if you struggle to control your drivers and can’t ensure they keep vehicles in good condition or drive them legally, then leasing may not be for you.
You also need to be certain about how long you will need the vehicle and the mileage you will cover, as the contract will be based on an agreed term and mileage. If you need to hand the car or van back before the contract is complete, then early termination charges may apply, especially in the first few months after registration when depreciation is steepest.
If you are certain how long you need the vehicle and you can look after it, then leasing works perfectly. With its low monthly costs, you free up money to invest elsewhere in the business and you have a budgeted cost – free from unexpected repair bills that may require cash from your business if you continue to acquire vehicles outright.
You also gain access to the support of experts whose sole purpose is to manage your vehicle, which means you can focus on running your business. And leave the fleet management to the experts.
Buy the car – vehicles funded with company cash without using external funding
Borrow the money – products include hire purchase, contract purchase, bank overdraft or loan.
Borrow the car – products include leasing, rental, subscriptions and mobility services
Simple, but not necessarily cost effective. A company uses its own funds to pay for the entire purchase cost of a new vehicle and takes all the residual value risk.
Hire purchase allows companies to spread the cost of their acquisition over a period of time, while still taking residual value risk.
Contract purchase is a more flexible buying option. Payments are typically based on the difference between the purchase price and a predicted residual value. At the end of the contract, you can make a final payment to cover the remaining value of the car, or walk away. The personal version is called personal contract purchase (PCP).
This is the most common way to acquire a company car or van, with a small initial outlay and low monthly payments to cover the rental for a set period. You need to agree the period and mileage in advance and stick to the agreement, including keeping the vehicle in good condition to avoid additional charges.
Finance lease gives the company fixed monthly payments, but it also takes the residual value risk on the vehicle.